27 June 2013

Bundesbank/Weidmann: Making the financial system more resilient

Central banks and securities exchanges have in common that they provide the economy with an infrastructure which is essential for a well-functioning market economy and laying the foundation for sustainable growth. Thus, an important task of central banks is to smooth the operation of payment systems.

Some years ago, financial integration in Europe was considered a one-way street leading to greater wealth. This view has been challenged by the financial crisis, since it has shown the flip-side of financial integration in Europe, which is mutual contagion. In order to reap the benefits of financial integration without having the downside risk of contagion effects, micro-prudential regulation needs tightening and effective macro-prudential regulation has to be established.

In order to achieve the key objective of a more stable and shock-resistant financial system, it is essential to strengthen the principle of individual responsibility and of liability. Ultimately, systemic importance infringes the principle of liability. The decisive question now is how the principle of liability could be strengthened by regulatory measures.

• In the case of banks, higher capital requirements are the favourable and chosen way. The implementation of Basel III – not only in Europe but hopefully in the United States, too – is therefore an important step towards making the financial system safer. I am convinced that it would make the banking sector less vulnerable and, thus, strengthen its liability if banks were required to hold sufficient capital for claims on sovereigns and not be allowed to accumulate them on too large a scale in future.
• The principle of liability is also important with regard to the establishment of a European banking union, which is currently the subject of heated debate. The main task of the single resolution mechanism that is currently being developed is to ensure the correct sequence of liability. If a bank is to be restructured or resolved, equity investors should be called on first to take losses, followed by the providers of debt capital and only then by depositors, taking due account of deposit guarantees in the respective member states and national or European rescue funds. Taxpayers should only be called upon as a very last resort.

To sum up, over the past five years, substantial progress has been made in the regulation of the financial system. Nevertheless, there is no room for complacency. There are still shortcomings in financial regulation to be eliminated. This notwithstanding, it is necessary to thoroughly assess the impact of the different reforms and measures. Ensuring that players in the financial system have to, and are able to, better bear losses and risks themselves in future will make the financial system more stable. Strengthening the principle of liability will help the financial system to serve the economy and society better.

Full speech

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